Perspectives on 2013

Ethanol Industry executives approach 2013 with optimism and concern.

By Holly Jessen & Susanne Retka Schill | November 05, 2012

Looking into the future, Jeff Roskam, CEO of the Kansas Alliance for Biorefining and Bioenergy, fears any modification of the renewable fuel standard (RFS). “Period,” he says. “Not only would this be detrimental to the existing industry, it would take us back to a petroleum monopoly on liquid fuels. Monopolies generally are not market justified.”

Roskam is one of four industry insiders Ethanol Producer Magazine spoke to for the December issue. The executives, two presidents and two CEOs, shared their hopes and fears about the coming year, while looking back on how 2012 will shape ethanol’s future. Each has a slightly different angle on the industry, from the helm of corn-ethanol companies, one of which is aiming for cellulosic ethanol, from the biomass business and from a brokerage firm embedded in the financial and physical marketplace. As one year turns into another, here’s what they had to say.

Overall, Roskam believes there needs to be a much greater recognition for the value of biomass. To that end, he believes higher corn prices will drive innovation, as ethanol producers realize the raw input costs for biomass are actually lower than recent high corn prices. “That hasn’t really existed too much in history of bioenergy,” he says.

Of course, more needs to be done to scale up biomass harvesting capacity and draw down the cost of harvesting and transporting biomass from field to plant gate. And that’s exactly what KABB is working on, through its subsidiary Feedstox. After assembling its fleet of advanced biomass harvesting equipment this spring, the equipment was put into use for the first time. The fleet, which is mostly for producing or moving square bales, has a combined capacity of 80,000 tons of harvested biomass. “We call it baling, road-siding and hauling [equipment,]” he says, adding that the nonprofit harvests biomass through partnerships or leasing agreements. “Our equipment is pretty darn close to fully utilized during this corn harvest.”

In the next year, KABB plans to add to its fleet and increase the amount of biomass harvested. The goal is to set up contracts with the cellulosic ethanol facilities that are currently under construction, following the harvest season from the Southern High Plains to the Northern High Plains for maximum utilization of equipment. “We’re still working on next year’s contracts with those facilities, to see what kind of equipment they might need,” he says.

Infrastructure to harvest and bale biomass is already in place, yet even the largest operators don’t have sufficient capacity to supply biorefineries. Roughly speaking, one 20 MMgy plant would need nearly 300,000 dry tons of feedstock yearly and the largest biomass aggregator has the equipment capacity to harvest only about one-third of that amount. In addition, existing markets, including for animal feed and bedding, may compete for supply. “That’s why scaling is such a big issue for the proposed refiners,” he says.

As a general rule, it costs about $50 a ton to get biomass to the plant gate, not counting the price paid to the farmer. In order to cut the cost of harvesting and delivering biomass, two factors are key: increasing crop density and cutting back on the number of passes or touches during harvest, he says. Dedicated energy crops naturally have higher crop density than agricultural residues such as wheat straw and corn stover. KABB estimates that corn stover yields 2.5 tons of biomass per acre compared to 7 tons per acre for grasses and 10-plus tons per acre for miscanthus. The greater the crop density, the more biomass can be harvested in less time, as well as offer substantial fuel savings and greenhouse gas emission reductions. Successfully cutting back on the number of passes and increasing crop density could decrease the cost by $15 a ton. “The annual savings to that plant, from us being able to reduce our cost from $50 to $35, would be $4.285 million, or 21 cents a gallon,” he says. “[That’s] a big incentive.”

Still, Roskam believes agricultural residues will be the first cellulosic feedstocks, partially because farmers assume less risk for greater utilization of crops they’re already planting. Feedstox’s combination combine balers, which harvest corn or wheat and bale stover or straw at the same time, have worked particularly well, he says. Depending on the agreement, Feedstox may harvest the grain and take the bales in barter or split the revenue with the producer. “They generally find that very attractive,” he says.

After spending 15 years working in the corn-ethanol industry and the past two years in biomass, Roskam feels strongly that there are opportunities to take the sucrose molecule to fuel ethanol, yes, but other chemical directions as well. “I think the opportunity is not exclusive for cellulosic ethanol,” he says. “I think it’s for organic chemicals from renewable sources, and that’s where I guess I get more optimism.”

Poet’s new CEO strikes a note of optimism for the industry, even in the face of a tough year ahead. “The biorefining industry is much more resilient than in previous years,” says Jeff Lautt. “Producers have worked to be more efficient and many have integrated new technologies to increase revenue and income. Despite the challenging business climate, we are not seeing the kind of shakeup we saw when things got tough in previous years.” Lautt took on the job at Poet in April, succeeding Jeff Broin who has stepped aside from the day-to-day operations, though he still leads the company’s board as executive chairman.

The blend wall will continue to be an issue for the industry, Lautt says. “It will be important for the entire industry to work hard to implement E15 into more stations across the country.” He also stresses the industry “must remain vigilant in addressing any misguided criticism or attempts to weaken the U.S. plans for energy independence, including changes to the renewable fuel standard. That’s important for our industry’s sake, but also for consumers’ sakes and for farmers’ sakes. With a new Congress coming in, it is crucial that we impress upon them what biofuels means for farm income, gas prices and the overall economy.”

As efforts to educate the public about the benefits of ethanol are stepped up, Lautt addresses the strategies that appear to work best. “I’ve found that the most effective points are those related to jobs and the economy,” he says. “We’re making a real impact by providing an additional market to farmers, new jobs in rural areas and new revenue circulating in local communities. Also, we have an important story to tell about distillers grains. Finally, we need to keep stressing that biofuels are keeping overall fuel prices lower for consumers." He adds that the ethanol industry must not get complacent when criticism dies down. “We have active opponents working every day to derail our efforts to expand domestic renewable fuel production. We have to work every day to get our message out as well.”

In looking ahead, Lautt sees the growing adoption of the biorefinery concept as the biggest shift coming for the ethanol industry. “I think that change is being felt across the industry,” he says. “We’re seeing the value of having a diverse range of products, and in the future we’ll be producing even more products from each kernel of corn.” For Poet, the product list will soon include cellulosic ethanol, as construction continues on its first facility at Emmetsburg, Iowa, in partnership with DSM. “Cellulosic ethanol provides opportunities for more feedstock and product diversity,” he says. “I see biorefineries in the future with multiple feedstocks coming in and multiple products—fuel, renewable power, food, feed, biochemicals and more—coming out.”

Dealing with a Tough Reality Neill McKinstray, president of The Andersons Ethanol Group

It’s impossible to look ahead to 2013 without considering the dry and crispy corn fields that withered in the drought and heat of 2012. “We’ve just experienced the most significant drought in 56 years, and there’s absolutely nothing we can do to expand the supply of corn in the next 12 months,” says Neill McKinstray, the current chairman of the Renewable Fuels Association. “That is a fact, and the market is going to have to adjust and deal with it.”

He points to the coming together of several factors that will create a dynamic and challenging situation. “The outlook will be for very tight margins in the industry and forced restrictions on some production in expectation that we’re going to have to fight for what corn is available. It will be high-priced corn.” he says. “On top of that, with the continued slow pace of gasoline consumption, the need for ethanol is not as great as it once was. And the development of E15 and E85 fuel distribution has not moved at the pace we might have anticipated at one point.” In early October, “somewhere north of 15 percent of capacity is shut down,” McKinstray says, with some producers temporarily idled while others operate at less than 100 percent of capacity.

With the uncertainty created by the attacks on the RFS and energy policy in general, “the industry will gravitate toward action and opportunities that are less uncertain,” he says. Such things as operating efficiency and systems improvements, better cost controls and well-tested new technology will be tried, he says, “as opposed to looking at some grand scheme involving huge acquisitions, new plants or untried technology.” While some plants may not be making much money right now, he notes, “they did a few years ago and they will have a war chest. Others may simply be trying to survive.”

Product diversification has become a key strategy for ethanol producers to mitigate tight margins, but The Andersons have taken it to another level. Ethanol production is only the latest of several diversifications. In 1947, when Harold and Margaret Anderson decided to capitalize on the truck traffic delivering grain to a single grain elevator in Maumee, Ohio, by adding a retail store.

Now a publicly traded company, The Andersons conducts business across North America in the grain and plant nutrient sectors, railcar leasing, turf and cob products, consumer retailing and ethanol.

McKinstray doesn’t think it is very productive to spend much time confronting or correcting corn ethanol critics. “You’re either one side or the other and typically you don’t see a lot of switching. Everyone’s got their view of the facts.” Instead, he likes to remind people what the industry’s early objectives were, including a new market for agricultural production, remediating air pollution, rural economic development and employment. “All those objectives have been addressed and clearly impacted in a positive way by the ethanol industry. Ag income has never been higher.” He points to the contrast between a recent trip to The Anderson’s ethanol plant in Iowa and his hometown in Illinois. “There’s nothing going on,” he says of his hometown. “Main Street is boarded up, and by the way, there’s no ethanol plant there. “I drive through small towns in Iowa that have really not much else going for them except there’s an ethanol plant nearby and there’s crop production. They’re thriving, and the unemployment rate in Iowa is half of what it is in the rest of the nation.” The industry should celebrate those successes, McKinstray says.

Utilizing Marketplace Tools to the Best Advantage Bob Shults, president and founding partner of Atlas Commodity Markets

Bob Shults has a hopeful outlook on 2013. The Texas-based commodity brokerage firm matches buyers and sellers at the best price, in the physical and financial markets for ethanol but also in agricultural products, feed ingredients, grains, crude oil and more. He’s excited about the future following the resolution of current regulatory and policy uncertainty surrounding the RFS and, in the financial world, the Dodd–Frank Wall Street Reform and Consumer Protection Act. “We’re going to have a much clearer picture of the political and regulatory environment, more certainty,” he says.

Looking into the future, Atlas believes 2013 will bring better alignment of the ethanol supply and demand equation and improved producer margins. Shults is encouraged by the fact that General Motors and Ford Motor Co. officially announced their newer vehicles can run on E15 and hopes to see continued acceptance of higher blends. He’d like to see other opportunities for increased ethanol demand, such as new engine technologies to take advantage of the fuels higher octane content. “If nothing else, we’ve got to see a closer alignment of the supply and demand,” he says.

Overall, the company is seeing improved liquidity in the financial ethanol markets as well as new participants, allowing for better commodity risk management. This could play a significant role in the ethanol and corn markets as it comes out of a rough year. The distillers grains market continues to become more efficient with time. “The financial tool in the DDG markets may become a more important piece of the picture, allowing better risk management on that side of things as well,” he says, adding that the feed ingredient brokerage team at Atlas continues to see strong demand for the product.

Calling the ethanol industry “extremely resilient in the face of a lot of obstacles,” Shults points out that it has continued to evolve in the ways it manages risk. That’s impressive, considering the industry's relative newcomer status in a multicommodity business world. The company is seeing an increase in industry participation in the financial markets, using tools such as swaps, options and block futures to manage commodity exposures. “They continually try to find new ways to increase their profitably through finding any kind of edge they can,” he says.